The difference between profits and revenues

With numbers thrown around making revenue look like the main achievement Billy MacInnes turns his attention to profits

Sometimes it’s easy to forget one when you’re looking at the other. Usually it’s profit.

So when, for example, people talk about the smartphone market it’s usually in the context of which operating system has the largest market share or which vendor sold the most units.

They’re very important metrics, but they’re not the only ones.

Which brings us back to profit.

And a startling statistic from Counterpoint concerning fourth quarter global handset profits. In the words of Counterpoint research anaylst, Karn Chauhan: “The Phone X alone generated 21% of total industry revenue and 35% of total industry profits during the quarter and its share is likely to grow as it advances further into its life cycle.” To put it into perspective, the iPhone X generated five times more profit than the combined profit of more than 600 Android OEMs during the quarter, despite only being available in the market for two months in that period.

In total, Apple accounted for 86% of total handset market profits with eight handsets in the top ten models.

With Counterpoint (and other analysts) coming to the view that the smartphone market has reached its peak, there is renewed pressure on the vendors to start generating profits. Right now, everyone else is scrabbling for a share of the 14% that Apple doesn’t own.

The arrival of Samsung’s Galaxy S9 towards the end of the first quarter of 2018 could have an impact and is likely to make more of an impression going forward into the year, although it should be noted that the Galaxy S8 Plus only accounted for 1.7% of global profits in the fourth quarter, coming in behind the iPhone 6. Samsung’s best performer in the fourth quarter was the Note 8, which was sixth out of the top 10 models.

The difficulty for Samsung as an Android phone supplier is that trying to differentiate itself enough to charge higher prices and make more profits than the other Android phone manufacturers is hard work. Apple has a slightly easier task because it has its own operating system. This gives it an edge over Samsung in terms of profitability because in any buying decision, people first have to make a choice between Android and iOS. If they choose iOS, they choose Apple. That’s it.

If they opt for Android, they might buy a Samsung smartphone but they could buy any one of hundreds of Android-based phones instead. To compete against the other Android vendors, Samsung has to make sure it has phones that match most of their price points. Apple doesn’t. Or at least, not quite as much, which is probably why it’s “low-cost” model, the SE, can still edge into the top 10 most profitable phones.

Samsung is trying to be two different things at the same time: a high-end competitor to Apple and a major player in the much wider Android phone market. That’s not an easy balancing act to pull off without causing brand confusion. The fact that it has two phones in the top ten most profitable smartphones is not to be sniffed at but it says something about the Android market overall that those are the only Android models in the top ten.

That said, Counterpoint believes the only way is up. For Chinese phone makers at least, as they increase their mix of mid to high end smartphones and the average selling price rises as a consequence.

Whether that’s at Samsung's or Apple’s expense remains to be seen although you would expect the iPhone 6 and iPhone 6s to drop out of the top ten soon given that the former model is more than three and a half years old and the latter is over two and a half years old.

Profit. Revenue.

Apple has a big lead in the former but its share of the smartphone market was down slightly in 2017 at 14% (according to Gartner). From Apple’s perspective, it has to strike the right balance between profits and sales. After all, there’s no point having a high profit margin if your sales are dwindling to the point of irrelevance. Apple is still the second largest smartphone vendor by sales but Huawei is gaining in third place.

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